Moving On: Starting a New Business After Filing for Bankruptcy

We’ve been looking at bankruptcy choices for your small business in the past few weeks. Today, let’s take a look at business life after bankruptcy.

Nothing keeps you from starting a new business after bankruptcy. You might be able to apply the lessons learned from your prior financial problems to the new business. If you start the new business soon after your bankruptcy, it might be difficult to obtain credit.

Here are some tips, as you move forward.

Keep the Business Separate From Yourself

If you filed for bankruptcy because of business debt you incurred as a sole proprietor or a partner in a failed partnership, consider using a different form for your new business, such as a corporation or and limited liability company.

The benefit of taking this approach is that these types of business entities are wholly responsible for the debt. If you sign a personal guarantee for a business debt (a promise to pay the debt if the company can’t do so), this benefit will be lost and you’ll take on the business debt as your own, as you would as a sole proprietor.

New Tax or Employer Identification Numbers

If your prior business was a sole proprietorship and part of your personal bankruptcy, or if you liquidated a prior corporation or limited liability company in Chapter 7 bankruptcy, you can’t start the new business with the same tax or employer identification numbers. You will need to obtain new numbers.

Keep in mind that a corporation or a limited liability company cannot receive a discharge in Chapter 7 bankruptcy. The business continues to owe the debt. Therefore, if you restart the business (or even a similar business under a different name), an old creditor can still take action to collect a debt that wasn’t paid in full in the bankruptcy.

Preparing for Financing Problems

If you start the new business as a corporation or limited liability company, and are the sole shareholder, banks and other lenders will likely ask about your personal credit history when they consider providing financing to the business. You could take some steps to increase your chances of having the business approved for financing, including:

Be Cautious About Small Business Administration Loans

While turning to the small business administration might sound like a good idea, be careful. Often, the small business administration requires not only personal guarantees for loans, but also requires you to use personal assets, most commonly your home, to secure the business debt.

Consider Financing Alternatives

Traditional financing from a bank isn’t the only way to go. Additionally, you might want to consider:

  • soliciting investors to fund your business
  • starting a personal service business that requires little or no operating capital
  • working as a subcontractor for an established business to reduce your operating capital needs

Business Taxes

Business owners maintain personal responsibility for business taxes. To avoid being stuck with a large bill, make sure that the business pays its tax debt timely and, most importantly, clearly identifies and pays to the property taxing authority any “trust fund” taxes. If you don’t, you may end up being personally liable for the taxes.

Trust fund taxes are the taxes that the business collects from others, such as payroll withholding and sales taxes (but usually not excise taxes). The business has the responsibility to collect and transmit the payment but is not directly paying the tax.

Carefully Extend Payment Terms to Your Customers

Because financing will be tight in the beginning, make sure that your new business is getting paid for the work it is doing. Extending payment terms to customers that are overly favorable might result in not getting paid at all.

Keep Good Business Records

If you are able to secure financing, it is likely that it will be on a short-term but renewable basis. Keep good records so that when the loan is up for renewal you can provide accurate figures to show that your business is succeeding and building up its own good credit.

For a more detailed explanation of your small business bankruptcy options, let’s schedule a consultation today.

Moshier Law Office, PLLC
St. Paul, Minnesota
651-645-1211

Chapter 13 Bankruptcy for Small Business Owners

Last week, we discussed Chapter 7 bankruptcy for small businesses that are going out of business. However, filing for Chapter 13 bankruptcy could help you reorganize debt and save your business.

How Does Chapter 13 Bankruptcy Work?

A Chapter 13 bankruptcy allows you to keep your assets while reorganizing and paying off all or a portion of your debts through a repayment plan, which usually lasts three to five years. During the bankruptcy, you make monthly payments to a bankruptcy trustee who then pays your creditors according to your plan.

How much you have to pay back depends on your income, expenses and the types of debt. The higher your income, the more you will have to pay. However, certain debts (called priority debts) must be paid off in your plan regardless of income. These include certain taxes and domestic support obligations among others. At the completion of your repayment plan, any remaining unsecured debts are discharged.

Can Small Businesses Use Chapter 13 Bankruptcy?

If your business is considered a separate legal entity, such as a corporation or a limited liability company, it cannot file Chapter 13 bankruptcy in its own name. Only individuals can file a Chapter 13.

However, sole proprietorships and certain partnerships are not considered separate legal entities distinct from their owners. So if the owner files Chapter 13 bankruptcy, it will provide the same benefit to the business. Further, even if your business is a separate entity, you may still be able to include a business debt in your Chapter 13, if you are personally liable.

Can You Include Business Debts in Chapter 13 Bankruptcy?

In your Chapter 13, you must include all debts for which you are personally liable. If your business is not a legal entity offering limited liability, you are personally obligated to pay its debts. The most common example is a sole proprietorship. A sole proprietor and his or her business are treated as the same person, and all business debts are included in the bankruptcy.

If your business is a corporation, limited liability company, or another form of separate business entity, you cannot include its debts in your bankruptcy unless you can show that you are personally liable on the obligation. Usually, if you cosigned or personally guaranteed a business debt, you will be on the hook for it. So you can include it in the bankruptcy.

Benefits of Chapter 13 Bankruptcy to Small Businesses

Chapter 13 bankruptcy provides several benefits and advantages to your small business that can help to keep it going.

Wipe Out Business Debts

As discussed, if you are a sole proprietor, your business debts are not distinguished from your personal debts. This means that you can discharge any non-priority unsecured business debts, such as credit cards when you complete your plan. After discharge, the creditor cannot collect from you or the business.

However, if a debt was included in your bankruptcy because you cosigned or guaranteed the debt for your business (which was a separate legal entity), then the discharge wipes out only your personal obligation and the creditor can still go after the assets of the business.

Pay Off Priority Creditors

If your business has priority debts like taxes you can pay them off in your repayment plan. You can include and pay off these debts in the Chapter 13 if you are a sole proprietor or are otherwise personally liable on them in addition to the business.

Cram Down Secured Loans

Through your Chapter 13 plan, you may be able to reduce the balance of certain secured debts (such as car or equipment loans) to the value of the property. This can reduce the burden on your business by consolidating these loans into your repayment plan and lowering your monthly payments.

The word DEBT written in chalk on a chalkboard being rubbed out by an eraser

Keep Your Business Assets

If your business has nonexempt assets, Chapter 13 bankruptcy allows you to keep them while you reorganize and pay off your debts. Unlike a Chapter 7 where the bankruptcy trustee takes these assets and sells them, Chapter 13 allows you to keep operating your business. But keep in mind that you have to pay your unsecured creditors an amount equal to the value of your nonexempt assets in your plan.

For a more detailed explanation of your small business bankruptcy options, let’s schedule a consultation today.

Moshier Law Office, PLLC
St. Paul, Minnesota
651-645-1211

Chapter 7 Bankruptcy for Small Business Owners

Last week, we did an overview of Chapter 7 and Chapter 13 bankruptcy for small business. This week we will take a closer, more in-depth look at the Chapter 7 option.

For a struggling small business owner, filing for Chapter 7 bankruptcy may help save your business or help you liquidate it. A personal Chapter 7 bankruptcy can also help you get rid of your personal liability for company debts. Let’s discuss when you may be personally liable for business debts and when it makes sense to file a business or personal Chapter 7 bankruptcy.

Are You Personally Liable for Business Debts?

The answer mostly depends on your business structure. If you did not form a specific business entity and you are the sole business owner, then you are a sole proprietor. A sole proprietorship is not a discrete legal entity, which means you are personally responsible for all business debts and when you file for bankruptcy, you are filing a personal bankruptcy.

If your business was formed as a partnership, corporation or limited liability company (LLC), your liability for your company’s debts depends on other factors. In a partnership, you are liable for business debts if you are a general partner but not if you are a limited partner. If your company is a corporation or an LLC, you are usually not liable for your company’s debts unless you cosigned or personally guaranteed the debt.

How Does Chapter 7 Bankruptcy Work?

When a Chapter 7 is filed, an automatic stay goes into effect and prohibits most collection activities. A bankruptcy trustee is appointed and charged with selling off the nonexempt assets to pay off creditors according to their priority.

In a personal bankruptcy, all dischargeable debts are wiped out so the debtor is no longer required to pay them. In a business bankruptcy, there is no discharge and no exemptions. As a result, all business assets are sold and the proceeds are distributed among creditors.

How Can Chapter 7 Bankruptcy Help Small Business Owners?

The answer again depends on business structure. Let’s discuss how Chapter 7 bankruptcy affects each type of business and its owners:

Sole Proprietorship

Because a sole proprietorship is not a discrete legal entity, it cannot file a Chapter 7 bankruptcy. When a sole proprietor files a personal Chapter 7 bankruptcy, the business also files. All business debts are treated as personal debts and are eliminated by the discharge. You can protect the assets of the business by using your exemptions. So with a Chapter 7 you can wipe out your debts and continue operating the business.

Partnership

A partnership is a discrete legal entity and is allowed to file a Chapter 7 business bankruptcy. Remember: in a business bankruptcy there is no discharge or exemptions. So if your partnership files a Chapter 7, the trustee will close and liquidate the business, selling all assets to pay creditors.

The partnership’s bankruptcy does not impact the personal liability of its partners. If there weren’t enough assets to pay off the creditors, they can come for your personal assets if you were personally liable for the debt. The trustee can also sue the general partners to pay remaining creditors. So if you were responsible for the partnership’s debts, you will likely have to file a personal Chapter 7 bankruptcy to discharge your obligations.

Corporation

Similar to a partnership, a corporation can also file a Chapter 7, but it does not receive a discharge. The benefit of a business Chapter 7 is an easy and orderly liquidation by placing the burden of selling assets and paying creditors on the trustee instead of the owners. Also, if you had cosigned or personally guaranteed a corporate debt, then you are still responsible for it unless you file a Chapter 7 personally.

Limited Liability Company (LLC)

An LLC is almost exactly the same as a corporation when it comes to bankruptcy and personal liability for debts. You can liquidate the business by filing a business bankruptcy but you must wipe out your own liability for business debts through a personal bankruptcy.

Next week, we will take a closer look at Chapter 13 bankruptcy for small business owners.

For a more detailed explanation of your small business bankruptcy options, let’s schedule a consultation today.

Moshier Law Office, PLLC
St. Paul, Minnesota
651-645-1211

Chapter 7 or Chapter 13 for Small Business?

If debts become unmanageable, small business owners can file for Chapter 7 or Chapter 13 bankruptcy. However, which chapter is right depends on the structure of the business, how much debt and assets you have, and whether you intend to continue the business. Let’s discuss the pros and cons of Chapter 7 and Chapter 13 bankruptcies for small businesses.

Who Can File For Chapter 7 Bankruptcy?

Both individuals and business entities can file for Chapter 7 bankruptcy. Small business owners can file Chapter 7 on behalf of their business or for themselves personally (sole proprietors must file a personal bankruptcy to wipe out business debts because you and your business are considered the same legal entity). However, many business owners file both because the business bankruptcy does not wipe out personal liability for business debts.

Pros of Chapter 7 Bankruptcy for Small Business Owners

Chapter 7 allows sole proprietors to wipe out both personal and business debts by filing a single personal bankruptcy. In addition, you can use exemptions to protect business assets. This allows you to continue operating the business after wiping out its debts in bankruptcy.

If your business is a partnership, corporation, or limited liability company (LLC), Chapter 7 bankruptcy provides a simple way to close down and liquidate the business. When you file a Chapter 7 on behalf of your business, it becomes the bankruptcy trustee’s responsibility to sell off the assets of the business and pay its creditors. This leaves you free to do other things, including seeking employment.

Cons of Chapter 7 Bankruptcy For Small Businesses

Unless you are a sole proprietor filing a personal bankruptcy, your business does not receive a discharge of its debts in Chapter 7 . Also, you cannot use exemptions to protect assets in a business bankruptcy. As a result, all assets of the business are sold to pay its creditors and the business is closed down.

You are still personally liable for any company obligations unless you file a personal Chapter 7 bankruptcy. As a result, it is best to file a business Chapter 7 if you wish to close up shop, the business has little or no assets, and you are not personally liable for company debts.

Who Can File for Chapter 13 Bankruptcy?

Only individuals are allowed to file for Chapter 13 bankruptcy. Business entities such as partnerships, corporations, or LLCs cannot file. However, similar to Chapter 7, sole proprietors can file a personal Chapter 13 to wipe out your personal and business debts.

Advantages Of Chapter 13 Bankruptcy For Small Business Owners

In a Chapter 13, you keep all your assets and pay back all or a portion of your debts through a repayment plan. If you are a sole proprietor with a lot of business assets, a Chapter 7 trustee may sell them if you don’t have enough exemptions. By filing a Chapter 13, you can protect all business assets and keep the business running while reorganizing your debts.

Even if your business is a separate entity like a partnership, corporation, or LLC, you can wipe out your personal liability for business debts with a Chapter 13. You can also do things with a Chapter 13 that you are not allowed to in a Chapter 7, including paying off priority creditors and cramming down secured loans through your plan.

Disadvantages Of Chapter 13 Bankruptcy

The biggest disadvantage to Chapter 13 is that business entities cannot file a Chapter 13. Also, Chapter 13 takes far longer than a Chapter 7 because you have to make monthly payments to a trustee for three to five years. If you have nonexempt assets, you can keep them but you must pay an amount equal to their value to unsecured creditors which can increase your plan payments significantly. Further, your discharge only wipes out your personal liability for business debts. The business itself must pay back its debts.

 

For a more detailed explanation of your small business bankruptcy options, let’s schedule a consultation today.

Moshier Law Office, PLLC
St. Paul, Minnesota
651-645-1211

Credit Card Debt in Bankruptcy and How to Live Without Them

The main reason most people file for Chapter 7 bankruptcy is to wipe out credit card debt. In most situations, your obligation to pay the balance will go away at the end of your case.

When the Trustee Pays Credit Card Creditors From the Bankruptcy Estate

Most Chapter 7 bankruptcies are “no-asset cases.” There’s no property to sell for the benefit of the creditors. In the rare asset case, creditors will receive money according to a priority ranking system. Credit card debts, which are nonpriority claims, fall at the bottom of the list. So it’s unusual for a credit card company to receive any payment.

Exceptions to the Dischargeability of Credit Card Debt

Although filing bankruptcy usually discharges credit card debt, it doesn’t always work that way. A balance incurred through actual fraud, a false misrepresentation, or false pretenses, will remain. It’s “nondischargeable,” so you’ll have to pay it after bankruptcy.

Credit card purchases are presumed fraudulent in two circumstances.

 Luxury goods. If you use a single credit card to buy more than $675 worth of luxury goods or services within 90 days of filing for bankruptcy, the debt is considered nondischargeable. Bankruptcy law defines “luxury goods or services” to exclude “goods or services reasonably necessary for the support or maintenance” of you or your dependents. Food, clothing, and gasoline, for example, are not usually considered luxury goods.

Cash advances. If you use a credit card to take more than $950 in cash advances within 70 days of filing bankruptcy, the debt is considered nondischargeable, regardless of how you use the money.

The exceptions to discharge for luxury goods and cash advances are not absolute. Under bankruptcy law, it is presumed that any charges for luxury goods and cash advances, within the specified limits, were made through false pretenses, a false misrepresentation, or actual fraud. This means that the burden is on you to prove that you intended to and reasonably believed that you could repay the charge when you incurred it, which is difficult to do.

How the Creditor Challenges Dischargeability

If a credit card company argues that a debt is nondischargeable, it must file a complaint with the bankruptcy court. Unless it files such a complaint, even claims for luxury goods and cash advances are discharged along with other obligations against you.

In Chapter 7 bankruptcy, the deadline for filing complaints challenging the dischargeability of a credit card debt is 60 days after the first meeting of creditors. If a creditor files a nondischargeability complaint, you must file a timely answer to dispute the creditor’s claim. Then the bankruptcy court will hold a hearing to decide whether your debt is dischargeable.

Guarantors and Cosigners on Credit Card Debt

The discharge applies only to the debtor in a bankruptcy case. It does not extend to guarantors or cosigners. If anyone else is liable for charges that you made on a credit card, they will still be liable after you file Chapter 7 bankruptcy, regardless of whether the claim is dischargeable against you.

How To Live Without Credit Cards

Budget, budget, budget: Budgeting is your greatest tool in living without credit cards for two reasons.

First, you need to budget enough money each month to pay off your current credit card debt. A good way to get ahead of your debt is to apply for a balance transfer credit card. Look for a card with a zero percent introductory APR, which will save you from paying interest for anywhere from 6-18 months and no or low balance transfer fees which will save you additional money.

Using a balance transfer card to consolidate all your credit card debt on one card will help you get rid of all your other cards.

Second, you should set enough money aside each month to create a savings account for any emergency spending, like for home repair or unexpected medical bills. Look for savings accounts with high APYs, so you can make the most off your investment.  Online savings accounts are a good idea because they offer the highest APYs and allow a limited number of withdrawals, which can curb the temptation to spend.

Don’t cancel your credit cards if you don’t have to. When most people decide to live without credit cards, they end up canceling the cards without regard to the consequences. Yes, canceling your credit cards altogether will obviously reduce the risk of spending what you can’t afford. The problem is that it will also hurt your ability to receive other lines of credit, whether that be a car loan, mortgage or student loans for your kids.  A better option is to pay off all of your credit cards, and then stop using them instead of cancelling them.

Make sure you have other types of credit: If you do plan on canceling your credit cards, you should keep a diversified credit portfolio full of other types of credit, such as mortgages, auto loans, student loans, etc. While not having credit cards will decrease your available credit, which could hurt your credit score, having these other types of credit will help balance out your credit score and show the credit bureaus that you still know how to utilize the debt you have.

Try a secured credit card: If your score does take a hit after cancelling your cards, or you want to prevent that from happening altogether, try getting a secured credit card. Since secured cards have lower limits – $250 to $500, usually – and the cards report to the credit bureaus, they are good option for people who don’t want to accrue debt but still need a credit card to improve their credit score.

Keep track of your credit score: Living without credit cards may be damaging to your credit score, which may make it difficult to get loans or a mortgage. As your good credit ages out of your credit report, your score will drop, so keeping a close eye on your credit score can alert you to when you need to start rebuilding your credit with other types of loans.

It might also be a good idea to sign up for a credit report monitoring service so you can keep track of how your score is being affected by your lack of credit cards. These services also alert you when there are any changes in your credit report, so they can also help protect against identity theft and fraud.

For a more detailed explanation of your bankruptcy options, let’s schedule a consultation today.

Moshier Law Office, PLLC
St. Paul, Minnesota
651-645-1211